Which ultra-lazy portfolio would you choose?

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Topic Author
withrye
Posts: 169
Joined: Mon Feb 29, 2016 12:48 pm

Which ultra-lazy portfolio would you choose?

Post by withrye »

I am strongly motivated by simplicity, and the one-fund portfolio is very appealing. That being said, there are two major sticking points when it comes to using something like Vanguard LifeStrategy Moderate Growth (VSMGX): 1) conservative asset allocation while I am still young, and 2) tax inefficiency given my high tax bracket.

I have been nibbling at the edges of this question for a while, determining what the tax cost for VSMGX would be for me (~1% per year), and trying to figure out whether I could live with a combination of Vanguard Tax-Managed Balanced (VTMFX) mixed with Vanguard Total International (VTIAX) (see here). I figured now was the time to ask the broader question about what approach might be best for me.

I am about to begin my first job as an attending physician. Values below regarding tax rate and contributions are relevant starting later this year / next year forward. To date I have had enough tax-advantaged space to never max out the space available. Now for the first time I will need to invest in ordinary taxable brokerage space, and I am very interested in finding a dead-simple investing plan (and fund(s)) that I can live with for the next 60 years.

I have access to excellent low-cost index funds for total US, total Int, and total US bond across all tax-advantaged accounts, so for simplicity I will list the portfolio according to what the sum total of the funds represent rather than each individual ticker. Assume an average ER of <0.1%.
Abbreviated portfolio as follows:

Emergency funds: 3 months
Debt: 40k in medical student loans at 1.95%, will be paid off in 3-4 years (I receive a modest return of interest paid if paying off within the next 3 years)
Tax Filing Status: MFJ
Tax Rate: 32% Federal, 5% State, 15% LTCG, 3.8% NIIT
State of Residence: MA
Age: 31
Desired Asset allocation: 100% stocks / 0% bonds (60% stocks / 40% bonds in retirement)
Desired International allocation: market-cap-weight% of stocks (50% is close enough as of 2021)

Portfolio size: Mid-six figures, all in a combination of traditional and Roth accounts

Current retirement assets

His 401k
32% Total International Stock

His Roth IRA
31% Total US Stock

Her 403b
13% Total International Stock

Her Roth IRA
24% Total US Stock
_______________________________________________________________

Contributions

New annual Contributions
$19500 his 401k 2% match
$19500 her 403b 2% match
$6000 his backdoor Roth IRA
$6000 her backdoor Roth IRA
$30000 taxable (for retirement, not short term goals)

Available funds

Assume cheap index funds for total US, total Int, and total US bond are available in tax-advantaged accounts.

Priorities:
1. Ideally one fund held in taxable for the next 60+ years.
2. Failing the above, something that requires almost no rebalancing. I want to enjoy my retirement and not spend it tinkering, and most importantly I want my spouse to enjoy her (statistically likely) widowhood many many decades from now and not have to think very hard at all to rebalance.

If a balanced fund is held, I would continue to hold 100% equity in tax-advantaged space. Given the head start in portfolio size, purchasing a 60/40 balanced fund would cause my asset allocation to drift down slightly from 100% to a minimum of around 80% stocks. I can always purchase bonds in tax-advantaged as I get closer to retirement to nudge it closer to 60/40.

Here are the three options I was considering:

1. Purchase VSMGX, accepting the 1% annual tax cost.

Pros: Maximally simple. I can gradually shift from 100% equity to 60% equity over time by managing the ratio of stock to bond in tax-advantaged accounts. Then in retirement, I can roll it all over to IRAs and purchase VSMGX in the IRAs, creating a true one-fund portfolio with no (financial) concerns in the world.

Cons: 1% annual tax drag is a lot to stomach. VSMGX has (small) manager risk, as Vanguard can't seem to help tinkering with the fund (that being said, all their changes to date are ones I have agreed with).

2. Purchase VTMFX/VTIAX in a 2:1 ratio in taxable.

Pros: Still quite simple (rebalancing doesn't require a calculator, just make sure VTIAX balance in taxable is half the dollar amount of VTMFX). Much smaller tax drag.

Cons: Still requires some rebalancing. I don't love the idea of statistical sampling in an index, and I'm even more wary of a bond holding that's just munis.

3. Purchase VTWAX in taxable, doing the inverse of strategy 1.

Pros: Quite simple in accumulation, with only one fund to purchase. Automatic rebalancing between US/Int, removing some behavioral risk to market timing either asset class. I can instead purchase more and more bonds in my tax-advantaged accounts to get to my desired asset allocation, creating very little tax drag and letting me phase in bonds with arbitrary precision in tax-advantaged while incurring no additional taxes for buying/selling as needed.

Cons: Not as simple in decumulation. The tax-advantaged accounts will always need to be balanced vis-a-vis bonds to keep the asset allocation in check. I may get "lucky" and be able to choose a Vanguard LS fund such that the ratio between 100% LS-fund in tax-advantaged and 100% VTWAX in taxable gets me an allocation that is "close enough" to 60/40. I estimate that holding LS-Conservative Growth against VTWAX in taxable would give me something close to 60/40.

Thank you!
Patzer
Posts: 701
Joined: Wed Jun 10, 2015 10:56 am

Re: Which ultra-lazy portfolio would you choose?

Post by Patzer »

I use a fairly complex portfolio, and like it that way, but I usually tell people who want simplicity to use a target date fund.

I find them too conservative, so I would go for one 10 years after you plan to retire to get more aggressive asset allocations.
I.e. if you want to retire in 2050, put all your money in a 2060 Vanguard Target Date Fund.
Topic Author
withrye
Posts: 169
Joined: Mon Feb 29, 2016 12:48 pm

Re: Which ultra-lazy portfolio would you choose?

Post by withrye »

Patzer wrote: Wed Jun 16, 2021 8:51 pm I use a fairly complex portfolio, and like it that way, but I usually tell people who want simplicity to use a target date fund.

I find them too conservative, so I would go for one 10 years after you plan to retire to get more aggressive asset allocations.
I.e. if you want to retire in 2050, put all your money in a 2060 Vanguard Target Date Fund.
Thanks for your input. As I understand it, even the latest-dated TDF purchased today would eventually hold 30/70 stock/bond at some point in my life, which is too conservative for my desired 60/40 allocation in retirement. I wouldn't be able to rebalance to something more appropriate without a large capital gains tax owed. Furthermore, I don't think the TDF would be any more tax efficient than the LS-Moderate Growth approach with VSMGX.
whereskyle
Posts: 1911
Joined: Wed Jan 29, 2020 9:29 am

Re: Which ultra-lazy portfolio would you choose?

Post by whereskyle »

withrye wrote: Wed Jun 16, 2021 8:45 pm I am strongly motivated by simplicity, and the one-fund portfolio is very appealing. That being said, there are two major sticking points when it comes to using something like Vanguard LifeStrategy Moderate Growth (VSMGX): 1) conservative asset allocation while I am still young, and 2) tax inefficiency given my high tax bracket.

I have been nibbling at the edges of this question for a while, determining what the tax cost for VSMGX would be for me (~1% per year), and trying to figure out whether I could live with a combination of Vanguard Tax-Managed Balanced (VTMFX) mixed with Vanguard Total International (VTIAX) (see here). I figured now was the time to ask the broader question about what approach might be best for me.

I am about to begin my first job as an attending physician. Values below regarding tax rate and contributions are relevant starting later this year / next year forward. To date I have had enough tax-advantaged space to never max out the space available. Now for the first time I will need to invest in ordinary taxable brokerage space, and I am very interested in finding a dead-simple investing plan (and fund(s)) that I can live with for the next 60 years.

I have access to excellent low-cost index funds for total US, total Int, and total US bond across all tax-advantaged accounts, so for simplicity I will list the portfolio according to what the sum total of the funds represent rather than each individual ticker. Assume an average ER of <0.1%.
Abbreviated portfolio as follows:

Emergency funds: 3 months
Debt: 40k in medical student loans at 1.95%, will be paid off in 3-4 years (I receive a modest return of interest paid if paying off within the next 3 years)
Tax Filing Status: MFJ
Tax Rate: 32% Federal, 5% State, 15% LTCG, 3.8% NIIT
State of Residence: MA
Age: 31
Desired Asset allocation: 100% stocks / 0% bonds (60% stocks / 40% bonds in retirement)
Desired International allocation: market-cap-weight% of stocks (50% is close enough as of 2021)

Portfolio size: Mid-six figures, all in a combination of traditional and Roth accounts

Current retirement assets

His 401k
32% Total International Stock

His Roth IRA
31% Total US Stock

Her 403b
13% Total International Stock

Her Roth IRA
24% Total US Stock
_______________________________________________________________

Contributions

New annual Contributions
$19500 his 401k 2% match
$19500 her 403b 2% match
$6000 his backdoor Roth IRA
$6000 her backdoor Roth IRA
$30000 taxable (for retirement, not short term goals)

Available funds

Assume cheap index funds for total US, total Int, and total US bond are available in tax-advantaged accounts.

Priorities:
1. Ideally one fund held in taxable for the next 60+ years.
2. Failing the above, something that requires almost no rebalancing. I want to enjoy my retirement and not spend it tinkering, and most importantly I want my spouse to enjoy her (statistically likely) widowhood many many decades from now and not have to think very hard at all to rebalance.

If a balanced fund is held, I would continue to hold 100% equity in tax-advantaged space. Given the head start in portfolio size, purchasing a 60/40 balanced fund would cause my asset allocation to drift down slightly from 100% to a minimum of around 80% stocks. I can always purchase bonds in tax-advantaged as I get closer to retirement to nudge it closer to 60/40.

Here are the three options I was considering:

1. Purchase VSMGX, accepting the 1% annual tax cost.

Pros: Maximally simple. I can gradually shift from 100% equity to 60% equity over time by managing the ratio of stock to bond in tax-advantaged accounts. Then in retirement, I can roll it all over to IRAs and purchase VSMGX in the IRAs, creating a true one-fund portfolio with no (financial) concerns in the world.

Cons: 1% annual tax drag is a lot to stomach. VSMGX has (small) manager risk, as Vanguard can't seem to help tinkering with the fund (that being said, all their changes to date are ones I have agreed with).

2. Purchase VTMFX/VTIAX in a 2:1 ratio in taxable.

Pros: Still quite simple (rebalancing doesn't require a calculator, just make sure VTIAX balance in taxable is half the dollar amount of VTMFX). Much smaller tax drag.

Cons: Still requires some rebalancing. I don't love the idea of statistical sampling in an index, and I'm even more wary of a bond holding that's just munis.

3. Purchase VTWAX in taxable, doing the inverse of strategy 1.

Pros: Quite simple in accumulation, with only one fund to purchase. Automatic rebalancing between US/Int, removing some behavioral risk to market timing either asset class. I can instead purchase more and more bonds in my tax-advantaged accounts to get to my desired asset allocation, creating very little tax drag and letting me phase in bonds with arbitrary precision in tax-advantaged while incurring no additional taxes for buying/selling as needed.

Cons: Not as simple in decumulation. The tax-advantaged accounts will always need to be balanced vis-a-vis bonds to keep the asset allocation in check. I may get "lucky" and be able to choose a Vanguard LS fund such that the ratio between 100% LS-fund in tax-advantaged and 100% VTWAX in taxable gets me an allocation that is "close enough" to 60/40. I estimate that holding LS-Conservative Growth against VTWAX in taxable would give me something close to 60/40.

Thank you!
Look into M1 Finance. You can implement your own glide path according to your own schedule. Stay 100% equities for as long as you like in VT (Vanguard Total world ETF). Add your desired bond etf to your pie when you want to. Set the desired percentage allocation and click rebalance.

Done.
"I am better off than he is – for he knows nothing and thinks that he knows. I neither know nor think that I know." - Socrates. "Nobody knows nothing." - Jack Bogle
Triple digit golfer
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Re: Which ultra-lazy portfolio would you choose?

Post by Triple digit golfer »

Easily option 3, in my opinion.

The others have bonds. I thought your desired AA was 100% equities.

A more tax efficient route is using VTSAX/VTIAX in taxable instead of VTWAX, allowing you to claim the foreign tax credit.
orklc
Posts: 81
Joined: Sun Mar 24, 2013 10:35 am

Re: Which ultra-lazy portfolio would you choose?

Post by orklc »

Of these, I'd choose option 3. Purchase VTWAX in taxable. The main reason being that it's simple enough, but not too simple, and it's a fund that you'll want to still hold many decades from now.

I also doubt that you can accurately predict how much you'll have in taxable vs tax advantaged decades from now, so worrying about whether you'll need some rebalancing in the future seems difficult to plan around. A case where the planning process is vital, but any specific plan is likely to be obsolete before very long.
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Sandtrap
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Re: Which ultra-lazy portfolio would you choose?

Post by Sandtrap »

As you mention simplicity and one fund and self balancing and 60 years…..

Vanguard Balanced Index Fund

One example.
Many decades ago, my FIL bought $37,000 of this fund when it first came out. He did not touch it and set it on auto reinvest I believe. 5 years ago, it had grown to $460,000.00
Not sure of the details, but this is a formidable example.
j🌺
Wiki Bogleheads Wiki: Everything You Need to Know
557880yvi
Posts: 529
Joined: Wed Mar 06, 2019 2:11 pm

Re: Which ultra-lazy portfolio would you choose?

Post by 557880yvi »

First, high marks for thinking about this so early and having such a good understanding at such a young age (and all while going through medical school)! If you haven't already found this, would strongly recommend checking out FiPhysician https://www.fiphysician.com/.

I am also a MA resident and it would also be beneficial for you to gain a good understanding of how MA taxes impact your future investing strategies (5% income, 12% income and the currently onerous state estate tax on estates over $1M (the value of just a home now near Boston) https://www.mass.gov/guides/a-guide-to-estate-taxes. It is causing us to seriously move north over the border to NH. Things will certainly change over your career but always good to keep your finger on the pulse of state tax impacts.

Also, find an excellent estate planning attorney if you have not already created your estate planning documents - probate-proof your estate with trusts now.

Congratulations on starting your career!
Ramjet
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Joined: Thu Feb 06, 2020 10:45 am

Re: Which ultra-lazy portfolio would you choose?

Post by Ramjet »

whereskyle wrote: Wed Jun 16, 2021 9:28 pm Look into M1 Finance. You can implement your own glide path according to your own schedule. Stay 100% equities for as long as you like in VT (Vanguard Total world ETF). Add your desired bond etf to your pie when you want to. Set the desired percentage allocation and click rebalance.

Done.
It really is a great platform if you want to rebalance frequently
mikejuss
Posts: 2833
Joined: Tue Jun 23, 2020 1:36 pm

Re: Which ultra-lazy portfolio would you choose?

Post by mikejuss »

OP, I guess I'm confused: do you or do you not want to hold all equities in your taxable account? If the former, why are you suggesting investing in balanced funds with bonds? Apologies if I'm missing something here.
50% VTSAX | 25% VTIAX | 25% VBTLX (retirement), 25% VTEAX (taxable)
Topic Author
withrye
Posts: 169
Joined: Mon Feb 29, 2016 12:48 pm

Re: Which ultra-lazy portfolio would you choose?

Post by withrye »

whereskyle wrote: Wed Jun 16, 2021 9:28 pm Look into M1 Finance. You can implement your own glide path according to your own schedule. Stay 100% equities for as long as you like in VT (Vanguard Total world ETF). Add your desired bond etf to your pie when you want to. Set the desired percentage allocation and click rebalance.

Done.
Ramjet wrote: Thu Jun 17, 2021 7:40 am It really is a great platform if you want to rebalance frequently
Thank you both for this recommendation. I admit I had a poor customer service experience with M1 Finance that soured me to them. In short, I tried to do a partial Roth IRA rollover to them to try their product and through a combination of poor communication and a series of incorrect answers to questions the process was delayed for over a month until I gave up in frustration.

I appreciate their ethos of low costs and infrequent trading, as well as their suite of modern tools for portfolio management. I'm wary, though, about their long term prospects. I have nephews that are older than M1. I didn't mention it in my OP, but alongside manager risk there's also brokerage risk to consider. Vanguard has been around for almost 50 years, and due to their shareholder structure I believe our incentives will remain broadly aligned for the next 50. Will M1 be the next Vanguard, known as a leader in pushing the boundary on low-cost yet sophisticated-enough investing? Perhaps. Do I want to stake my portfolio on it? I'm less sure.

I know that things happen and change is constant, but it'd be great not to have to leave my brokerage mid-stream and figure out what happens to all those partial shares of ETFs in my "pie."

That being said, I will take your recommendation to heart and take another, closer, look at M1's offerings. Perhaps the allure of free hands-off asset allocation and rebalancing decisions will be strong enough to convince me.
Topic Author
withrye
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Joined: Mon Feb 29, 2016 12:48 pm

Re: Which ultra-lazy portfolio would you choose?

Post by withrye »

Triple digit golfer wrote: Wed Jun 16, 2021 9:43 pm Easily option 3, in my opinion.

The others have bonds. I thought your desired AA was 100% equities.

A more tax efficient route is using VTSAX/VTIAX in taxable instead of VTWAX, allowing you to claim the foreign tax credit.
mikejuss wrote: Thu Jun 17, 2021 8:01 am OP, I guess I'm confused: do you or do you not want to hold all equities in your taxable account? If the former, why are you suggesting investing in balanced funds with bonds? Apologies if I'm missing something here.
My current desired AA is 100% equities, but I want to end with an approximately 60/40 portfolio in retirement. As a result, I want to find a strategy for investing in my taxable account that gives me the flexibility to hold a 60/40 portfolio in retirement with the least effort.

If I start with a balanced fund, it's true that my portfolio will slowly fall from my 100% equity allocation, but given the size differential between my tax-advantaged (100% equity) and new taxable brokerage (balanced 60/40), the equity allocation will (likely) slowly fall from 100% to a minimum of around 80% in 15-20 years. This glide path is acceptable to me, which is why I'm considering the balanced fund options. In retirement, I can switch all assets in tax-advantaged accounts to mirror my taxable holding (60/40) and thereby simplify my portfolio further.

The last alternative (option 3) keeps me in 100% equities for longer, but requires ongoing rebalancing in retirement to maintain a 60/40 allocation by holding bonds in tax-advantaged accounts. My priorities include ideally holding one fund and ideally minimizing all rebalancing needs.
alfaspider
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Re: Which ultra-lazy portfolio would you choose?

Post by alfaspider »

I think you are overthinking this. There's no reason why a standard bogglehead portfolio wouldn't accomplish your objectives.

Just do an 80/20 VTI/BND until you retire. 60/40 after. You can tinker with those numbers based on your risk tolerance. Done. Rebalancing isn't essential, but it takes 10 minutes a year if you really want to do it.
mikejuss
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Re: Which ultra-lazy portfolio would you choose?

Post by mikejuss »

withrye wrote: Thu Jun 17, 2021 8:21 am
mikejuss wrote: Thu Jun 17, 2021 8:01 am OP, I guess I'm confused: do you or do you not want to hold all equities in your taxable account? If the former, why are you suggesting investing in balanced funds with bonds? Apologies if I'm missing something here.
My current desired AA is 100% equities, but I want to end with an approximately 60/40 portfolio in retirement. As a result, I want to find a strategy for investing in my taxable account that gives me the flexibility to hold a 60/40 portfolio in retirement with the least effort.

If I start with a balanced fund, it's true that my portfolio will slowly fall from my 100% equity allocation, but given the size differential between my tax-advantaged (100% equity) and new taxable brokerage (balanced 60/40), the equity allocation will (likely) slowly fall from 100% to a minimum of around 80% in 15-20 years. This glide path is acceptable to me, which is why I'm considering the balanced fund options. In retirement, I can switch all assets in tax-advantaged accounts to mirror my taxable holding (60/40) and thereby simplify my portfolio further.

The last alternative (option 3) keeps me in 100% equities for longer, but requires ongoing rebalancing in retirement to maintain a 60/40 allocation by holding bonds in tax-advantaged accounts. My priorities include ideally holding one fund and ideally minimizing all rebalancing needs.
It strikes me as unwise for you to buy a balanced fund right now. How do you know how much money you're going to be putting into your taxable account over the next decades? Don't overthink this: just pick a stock fund now, and then add a bond fund later. And by the way, you're absolutely certain you're comfortable with an all-equities portfolio? Many are comfortable with it when the market is hot, and then the you-know-what hits the fan, and they panic.
50% VTSAX | 25% VTIAX | 25% VBTLX (retirement), 25% VTEAX (taxable)
Topic Author
withrye
Posts: 169
Joined: Mon Feb 29, 2016 12:48 pm

Re: Which ultra-lazy portfolio would you choose?

Post by withrye »

mikejuss wrote: Thu Jun 17, 2021 8:28 am It strikes me as unwise for you to buy a balanced fund right now. How do you know how much money you're going to be putting into your taxable account over the next decades? Don't overthink this: just pick a stock fund now, and then add a bond fund later. And by the way, you're absolutely certain you're comfortable with an all-equities portfolio? Many are comfortable with it when the market is hot, and then the you-know-what hits the fan, and they panic.
I think you're right that the projection of amounts in each account is good for maybe a year or two before all bets are off. That does make me lean toward the VTWAX option to keep the door open.

I am not absolutely certain an all-equities portfolio is right for me. I know that in March 2020 I was comfortable on the way down. (Financially, at least; work was another matter haha.) I don't know if I would have remained as comfortable if the market had stayed in that deep hole these past 15 months, and I don't know whether the rapid market recovery gives me a false sense of security regarding this risk tolerance. But I do vividly recall on the days the market was hitting the breakers that my emotional state was unbothered by the market activity.
mikejuss
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Re: Which ultra-lazy portfolio would you choose?

Post by mikejuss »

withrye wrote: Thu Jun 17, 2021 8:42 am
mikejuss wrote: Thu Jun 17, 2021 8:28 am It strikes me as unwise for you to buy a balanced fund right now. How do you know how much money you're going to be putting into your taxable account over the next decades? Don't overthink this: just pick a stock fund now, and then add a bond fund later. And by the way, you're absolutely certain you're comfortable with an all-equities portfolio? Many are comfortable with it when the market is hot, and then the you-know-what hits the fan, and they panic.
I think you're right that the projection of amounts in each account is good for maybe a year or two before all bets are off. That does make me lean toward the VTWAX option to keep the door open.

I am not absolutely certain an all-equities portfolio is right for me. I know that in March 2020 I was comfortable on the way down. (Financially, at least; work was another matter haha.) I don't know if I would have remained as comfortable if the market had stayed in that deep hole these past 15 months, and I don't know whether the rapid market recovery gives me a false sense of security regarding this risk tolerance. But I do vividly recall on the days the market was hitting the breakers that my emotional state was unbothered by the market activity.
Cool--that's even more reason to just buy a stock fund right now, and see how you feel when there's a dip. You can sprinkle bonds into your portfolio as you wish. A balanced fund will only complicate things for you.
50% VTSAX | 25% VTIAX | 25% VBTLX (retirement), 25% VTEAX (taxable)
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retiredjg
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Re: Which ultra-lazy portfolio would you choose?

Post by retiredjg »

I've been following your other threads and things certainly look different now that we see the rest of the story. :happy

I think planning with the future in mind is good, but you may be taking this a little too far. Investing may not look anything like today when you reach retirement and withdraw over many years in retirement.


Idea 1 - LS Moderate Growth in taxable is just a poor choice for that many years in your tax bracket. It would be different if you had a windfall after retirement and wanted to buy it in taxable (lower tax bracket we hope and shorter time).

Idea 2 - Tax managed balanced and total international in taxable - puts all your fixed income assets in municipal bonds. I don't think that is wise. And how is that simpler than total stock and total international?

Idea 3 - Total world in taxable - is reasonable. Your bonds will be more diversified and in the tax-deferred accounts. This is a good idea because your 401's will eventually have RMDs - so while you want your portfolio to grow, it can be wise for those 401ks to grow slower than the overall portfolio.

I can't predict the future, but my guess is that a total stock and a total international in taxable will be good choices for taxable for a long time. I would hold them separately for the flexibility. Holding them together is reasonable, but definitely less flexible.
Topic Author
withrye
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Re: Which ultra-lazy portfolio would you choose?

Post by withrye »

retiredjg wrote: Thu Jun 17, 2021 9:05 am I've been following your other threads and things certainly look different now that we see the rest of the story. :happy

I think planning with the future in mind is good, but you may be taking this a little too far. Investing may not look anything like today when you reach retirement and withdraw over many years in retirement.


Idea 1 - LS Moderate Growth in taxable is just a poor choice for that many years in your tax bracket. It would be different if you had a windfall after retirement and wanted to buy it in taxable (lower tax bracket we hope and shorter time).

Idea 2 - Tax managed balanced and total international in taxable - puts all your fixed income assets in municipal bonds. I don't think that is wise. And how is that simpler than total stock and total international?

Idea 3 - Total world in taxable - is reasonable. Your bonds will be more diversified and in the tax-deferred accounts. This is a good idea because your 401's will eventually have RMDs - so while you want your portfolio to grow, it can be wise for those 401ks to grow slower than the overall portfolio.

I can't predict the future, but my guess is that a total stock and a total international in taxable will be good choices for taxable for a long time. I would hold them separately for the flexibility. Holding them together is reasonable, but definitely less flexible.
Thank you for your feedback, on this and the prior topics!

The more I consider it the more I'm coming around to the idea that my finances are not the one magic corner of my life that's perfectly predictable and immune to change. :wink:

I am leaning toward the stock approach in taxable. I am still stuck on VTWAX vs VTSAX/VTIAX. I know I lost around 0.1% due to loss of the foreign tax credit, and I also lose the ability to change my mind and/or tax-loss harvest. I don't think all flexibility is good though. While I'm reasonably confident I can stick with 100% equity for as long as I want, I'm less certain about my ability to hold a market-cap-weighted US/Int split through decades of oscillation in performance one way or another. I think Odysseus was onto something when he demanded he be tied to the mast.
mikejuss
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Re: Which ultra-lazy portfolio would you choose?

Post by mikejuss »

withrye wrote: Thu Jun 17, 2021 9:33 amI am leaning toward the stock approach in taxable. I am still stuck on VTWAX vs VTSAX/VTIAX. I know I lost around 0.1% due to loss of the foreign tax credit, and I also lose the ability to change my mind and/or tax-loss harvest. I don't think all flexibility is good though. While I'm reasonably confident I can stick with 100% equity for as long as I want, I'm less certain about my ability to hold a market-cap-weighted US/Int split through decades of oscillation in performance one way or another. I think Odysseus was onto something when he demanded he be tied to the mast.
You raise an interesting question: how meaningful is the foreign tax credit that seems to be an obsession among tax-efficiency-minded Bogleheads? What does the credit amount to?

Nevertheless, I still think it's nice to be able to control your allocation to international. But if you're an incessant tinkerer, maybe VTWAX (otherwise known as the "Odysseus tied to the mast" fund) is better for you. Still, don't pull your hair out over this decision.
50% VTSAX | 25% VTIAX | 25% VBTLX (retirement), 25% VTEAX (taxable)
ruud
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Re: Which ultra-lazy portfolio would you choose?

Post by ruud »

mikejuss wrote: Thu Jun 17, 2021 9:49 am You raise an interesting question: how meaningful is the foreign tax credit that seems to be an obsession among tax-efficiency-minded Bogleheads? What does the credit amount to?
Roughly about 0.2%, or a $200 credit for $100,000 invested in an international fund.

Keep in mind international funds tend to have higher dividend yields and a lower percentage qualified dividends, which in high tax brackets diminish or fully negate the benefit of the foreign tax credit.
.
mikejuss
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Re: Which ultra-lazy portfolio would you choose?

Post by mikejuss »

ruud wrote: Thu Jun 17, 2021 9:55 am
mikejuss wrote: Thu Jun 17, 2021 9:49 am You raise an interesting question: how meaningful is the foreign tax credit that seems to be an obsession among tax-efficiency-minded Bogleheads? What does the credit amount to?
Roughly about 0.2%, or a $200 credit for $100,000 invested in an international fund.

Keep in mind international funds tend to have higher dividend yields and a lower percentage qualified dividends, which in high tax brackets diminish or fully negate the benefit of the foreign tax credit.
Thank you. You confirmed my suspicion. I'm not going to lose sleep over this.
50% VTSAX | 25% VTIAX | 25% VBTLX (retirement), 25% VTEAX (taxable)
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retiredjg
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Re: Which ultra-lazy portfolio would you choose?

Post by retiredjg »

withrye wrote: Thu Jun 17, 2021 9:33 am The more I consider it the more I'm coming around to the idea that my finances are not the one magic corner of my life that's perfectly predictable and immune to change. :wink:
Wise realization. Once reason I like flexibility.

I am leaning toward the stock approach in taxable. I am still stuck on VTWAX vs VTSAX/VTIAX. I know I lost around 0.1% due to loss of the foreign tax credit, and I also lose the ability to change my mind and/or tax-loss harvest.
You can change your mind simply by diverting new money into one or the other of the single funds.

You can tax loss harvest very easily. Sell the total world and buy the two underlying funds. If the market continues down, make a round trip later on (watching the 30 day limits and what you are holding in your IRAs and maybe 401ks).

I don't think all flexibility is good though. While I'm reasonably confident I can stick with 100% equity for as long as I want, I'm less certain about my ability to hold a market-cap-weighted US/Int split through decades of oscillation in performance one way or another. I think Odysseus was onto something when he demanded he be tied to the mast.
Is there a US:foreign ratio that you feel you could maintain through decades of oscillation? Remember, it is not important to maintain market weight in this area if you are more comfortable with something else. Many people hold 0%, 20%, 30%, and 40% of their stocks in international. Don't let your money make you unhappy by trying to stick with a plan that does not make you happy.
Mike Scott
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Re: Which ultra-lazy portfolio would you choose?

Post by Mike Scott »

For simple, lazy and tax efficient with 100% stock now... look at VTSAX and VTIAX split 50/50 in all accounts... only two funds kept at equal $ amounts in each account when you add new money. Down the road, you can make any adjustments in your tax advantaged accounts by putting $ into a balanced fund (Life Strategy etc) or whatever else you want then.
KyleAAA
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Re: Which ultra-lazy portfolio would you choose?

Post by KyleAAA »

If I were really ultra lazy I imagine I would just flip a coin. But since you'll likely be high income you really should take taxes into account, which means no bonds in taxable if you can help it. I'd probably just load up on VGLT (long term treasuries) in tax-advantaged until you've met your bond allocation, and then VT for the rest. If you want to go one step further, you could play games allocating between VTI and VXUS in taxable depending on which is likely to be more tax efficient going forward (i.e. has a lower yield taking into account foreign tax credit). You'd probably end up with much more VTI in taxable and much more VXUS in tax-deferred.

But realistically, even "complicated" portfolios require less than 1 hour per year to manage. So simplicity doesn't buy you much.
canucksmoney
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Re: Which ultra-lazy portfolio would you choose?

Post by canucksmoney »

I am Canadian but we have similar types of accounts. I use the Canadian equivalent of the Lifestrategy funds.

Taxable - 80/20 Lifestrategy
Tax free - 80/20 Lifestrategy
Tax deferred - 100% bonds (@10% of total portfolio)

It is @70/30 AA. It’s good enough.

I do not tax loss harvest. I do not rebalance. It’s very simple.

I could forget about my accounts and it will still be a very reasonable allocation.

I have invested through the dot com and the GFC.

I realized that I simply don’t care enough about the details. But I can hold onto anything reasonable.

I do not need a perfect portfolio just a good enough one. Plus I am incredibly lazy so the less I do, the better.
Triple digit golfer
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Re: Which ultra-lazy portfolio would you choose?

Post by Triple digit golfer »

withrye wrote: Thu Jun 17, 2021 8:21 am
Triple digit golfer wrote: Wed Jun 16, 2021 9:43 pm Easily option 3, in my opinion.

The others have bonds. I thought your desired AA was 100% equities.

A more tax efficient route is using VTSAX/VTIAX in taxable instead of VTWAX, allowing you to claim the foreign tax credit.
mikejuss wrote: Thu Jun 17, 2021 8:01 am OP, I guess I'm confused: do you or do you not want to hold all equities in your taxable account? If the former, why are you suggesting investing in balanced funds with bonds? Apologies if I'm missing something here.
My current desired AA is 100% equities, but I want to end with an approximately 60/40 portfolio in retirement. As a result, I want to find a strategy for investing in my taxable account that gives me the flexibility to hold a 60/40 portfolio in retirement with the least effort.

If I start with a balanced fund, it's true that my portfolio will slowly fall from my 100% equity allocation, but given the size differential between my tax-advantaged (100% equity) and new taxable brokerage (balanced 60/40), the equity allocation will (likely) slowly fall from 100% to a minimum of around 80% in 15-20 years. This glide path is acceptable to me, which is why I'm considering the balanced fund options. In retirement, I can switch all assets in tax-advantaged accounts to mirror my taxable holding (60/40) and thereby simplify my portfolio further.

The last alternative (option 3) keeps me in 100% equities for longer, but requires ongoing rebalancing in retirement to maintain a 60/40 allocation by holding bonds in tax-advantaged accounts. My priorities include ideally holding one fund and ideally minimizing all rebalancing needs.
Decide what you want your AA to be now. Then fill your space with the appropriate investments that give your ideal mix of simplicity and tax efficiency. Often times the simplest is not the most tax-efficient, and vice versa.

You said your desired AA is 100/0 and simplicity is very important to you, hence my recommendation of 100% VTWAX in taxable.

If you're okay with an AA that isn't quite 100% equities, then use LifeStrategy or target date fund in all your accounts. That'll be 80-90% equities if you choose the most aggressive ones.
ivgrivchuck
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Re: Which ultra-lazy portfolio would you choose?

Post by ivgrivchuck »

The challenge is that there doesn't to my knowledge exist a single 100/0 to 60/40 glide path fund.

But you can easily implement your own... For now split everything between VTI/VXUS. 20 years before retirement start putting money into BND, so that the BND allocation increases 2 percentage points per year. Done.

If you want absolute simplicity, choose a retirement target date fund, those typically glide from 94/6 to 35/65. So not exactly what you want, but provides the absolute simplicity...
25% VTI | 25% VXUS | 12.5% AVUV | 10% AVDV | 2.5% VWO | 25% BND/SCHR/SCHP
Jacklh
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Re: Which ultra-lazy portfolio would you choose?

Post by Jacklh »

Keep it simple with a three fund portfolio. Don't lock yourself into a future tax problem by combining bonds with with stocks in your taxable account.

In your taxable account: Use total US stock and total international stock ETF's. ETF's can be transferred tax free to another brokerage in the future if ever needed. Use whatever ratio you want such as 60% US and 40% international stock. Don't obsess if it isn't perfect. Just glance at it every year or two or more. Then you can just deposit to the ETF that lags your original ratio.

In your Roth IRA: Do the same but use stock funds or ETF's as they can always be exchanged tax free at any time.

In your traditional IRA: The same as the Roth above but add bonds as you see fit over the years.

This is very simple to manage and is also flexible over the next decades. Don't obsess about it. Perfection is not required. Close enough is good enough.
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withrye
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Re: Which ultra-lazy portfolio would you choose?

Post by withrye »

retiredjg wrote: Thu Jun 17, 2021 10:11 am Is there a US:foreign ratio that you feel you could maintain through decades of oscillation? Remember, it is not important to maintain market weight in this area if you are more comfortable with something else. Many people hold 0%, 20%, 30%, and 40% of their stocks in international. Don't let your money make you unhappy by trying to stick with a plan that does not make you happy.
I don't think there is an absolute timeless ratio that I would be comfortable with through decades of oscillation. In retrospect, I would have been comfortable with 50% of both over the past 50 years since the 70s. But that's knowing that market cap of the US has hovered between 40-70% during that time. I don't know what the forward-looking ratio will be, so I'd feel most comfortable maintaining something closer to market cap, whatever that may be. So if the US experiences a large relative decline and ends up at 20% market cap, I wouldn't feel comfortable continuing to hold 50%. This is the allure of VTWAX for me: not only do I get the market cap weight that I want, but I don't have to think and second guess the decision at each turn in the market outlook.
canucksmoney wrote: Thu Jun 17, 2021 10:36 am I am Canadian but we have similar types of accounts. I use the Canadian equivalent of the Lifestrategy funds.

Taxable - 80/20 Lifestrategy
Tax free - 80/20 Lifestrategy
Tax deferred - 100% bonds (@10% of total portfolio)

It is @70/30 AA. It’s good enough.

I do not tax loss harvest. I do not rebalance. It’s very simple.

I could forget about my accounts and it will still be a very reasonable allocation.

I have invested through the dot com and the GFC.

I realized that I simply don’t care enough about the details. But I can hold onto anything reasonable.

I do not need a perfect portfolio just a good enough one. Plus I am incredibly lazy so the less I do, the better.
This is reassuring to hear. In Canada, are stocks preferentially taxed as compared to bond income as they are in the US? I am looking at a likely 0.6% or higher annual cost for my desired LifeStrategy approach as compared to the cheaper options. I'd be ok with that if there weren't a better offer, but in the US (and for now) I get much less tax drag by holding only stocks in my taxable account.
ivgrivchuck wrote: Thu Jun 17, 2021 4:34 pm The challenge is that there doesn't to my knowledge exist a single 100/0 to 60/40 glide path fund.

But you can easily implement your own... For now split everything between VTI/VXUS. 20 years before retirement start putting money into BND, so that the BND allocation increases 2 percentage points per year. Done.

If you want absolute simplicity, choose a retirement target date fund, those typically glide from 94/6 to 35/65. So not exactly what you want, but provides the absolute simplicity...
If I'm willing to pay the ~1% tax drag, I can have my cake and eat it too. I wouldn't hold a single fund through accumulation, but by holding 100% stock in tax-advantaged and then buying increasing amounts of LS-Moderate at 60/40 in taxable, my allocation will naturally drift gradually downward closer to 60/40 over time. Then in retirement everything can be consolidated to LS-Moderate and I'd have a truly simple, truly one-fund portfolio through the rest of retirement.

All of that being said, I think the 1% tax drag is too big a pill to swallow, and I think I'll go with the VTWAX approach. I get some simplicity, some annual tax savings, and most importantly I get to keep an appropriate asset allocation in retirement (the 30/70 allocation of a Target Date Fund is too far away from my target and no desire for simplicity will have me sacrifice on the proper asset allocation for me).
OldSport
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Re: Which ultra-lazy portfolio would you choose?

Post by OldSport »

Patzer wrote: Wed Jun 16, 2021 8:51 pm I use a fairly complex portfolio, and like it that way, but I usually tell people who want simplicity to use a target date fund.

I find them too conservative, so I would go for one 10 years after you plan to retire to get more aggressive asset allocations.
I.e. if you want to retire in 2050, put all your money in a 2060 Vanguard Target Date Fund.
Would be very interested in understanding your fairly complex portfolio and why you chose it.
OldSport
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Re: Which ultra-lazy portfolio would you choose?

Post by OldSport »

withrye wrote: Thu Jun 17, 2021 6:52 pm
retiredjg wrote: Thu Jun 17, 2021 10:11 am Is there a US:foreign ratio that you feel you could maintain through decades of oscillation? Remember, it is not important to maintain market weight in this area if you are more comfortable with something else. Many people hold 0%, 20%, 30%, and 40% of their stocks in international. Don't let your money make you unhappy by trying to stick with a plan that does not make you happy.
I don't think there is an absolute timeless ratio that I would be comfortable with through decades of oscillation. In retrospect, I would have been comfortable with 50% of both over the past 50 years since the 70s. But that's knowing that market cap of the US has hovered between 40-70% during that time. I don't know what the forward-looking ratio will be, so I'd feel most comfortable maintaining something closer to market cap, whatever that may be. So if the US experiences a large relative decline and ends up at 20% market cap, I wouldn't feel comfortable continuing to hold 50%. This is the allure of VTWAX for me: not only do I get the market cap weight that I want, but I don't have to think and second guess the decision at each turn in the market outlook.
canucksmoney wrote: Thu Jun 17, 2021 10:36 am I am Canadian but we have similar types of accounts. I use the Canadian equivalent of the Lifestrategy funds.

Taxable - 80/20 Lifestrategy
Tax free - 80/20 Lifestrategy
Tax deferred - 100% bonds (@10% of total portfolio)

It is @70/30 AA. It’s good enough.

I do not tax loss harvest. I do not rebalance. It’s very simple.

I could forget about my accounts and it will still be a very reasonable allocation.

I have invested through the dot com and the GFC.

I realized that I simply don’t care enough about the details. But I can hold onto anything reasonable.

I do not need a perfect portfolio just a good enough one. Plus I am incredibly lazy so the less I do, the better.
This is reassuring to hear. In Canada, are stocks preferentially taxed as compared to bond income as they are in the US? I am looking at a likely 0.6% or higher annual cost for my desired LifeStrategy approach as compared to the cheaper options. I'd be ok with that if there weren't a better offer, but in the US (and for now) I get much less tax drag by holding only stocks in my taxable account.
ivgrivchuck wrote: Thu Jun 17, 2021 4:34 pm The challenge is that there doesn't to my knowledge exist a single 100/0 to 60/40 glide path fund.

But you can easily implement your own... For now split everything between VTI/VXUS. 20 years before retirement start putting money into BND, so that the BND allocation increases 2 percentage points per year. Done.

If you want absolute simplicity, choose a retirement target date fund, those typically glide from 94/6 to 35/65. So not exactly what you want, but provides the absolute simplicity...
If I'm willing to pay the ~1% tax drag, I can have my cake and eat it too. I wouldn't hold a single fund through accumulation, but by holding 100% stock in tax-advantaged and then buying increasing amounts of LS-Moderate at 60/40 in taxable, my allocation will naturally drift gradually downward closer to 60/40 over time. Then in retirement everything can be consolidated to LS-Moderate and I'd have a truly simple, truly one-fund portfolio through the rest of retirement.

All of that being said, I think the 1% tax drag is too big a pill to swallow, and I think I'll go with the VTWAX approach. I get some simplicity, some annual tax savings, and most importantly I get to keep an appropriate asset allocation in retirement (the 30/70 allocation of a Target Date Fund is too far away from my target and no desire for simplicity will have me sacrifice on the proper asset allocation for me).
FWIW I'm 100% stock in long term retirement portfolios, including Roth IRA, 401k, and taxable. Have 70/30 US/International and tilt a bit more small cap than market weight.

I do have a large-ish multi-tier Emergency fund, with 3 months expenses in money market, 3 months Wellesley, and 6 months in Wellington. They are tax inefficient, but cost basis also goes up substantially, so relatively low taxes if I actually need to sell these.
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withrye
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Re: Which ultra-lazy portfolio would you choose?

Post by withrye »

OldSport wrote: Thu Jun 17, 2021 7:08 pm FWIW I'm 100% stock in long term retirement portfolios, including Roth IRA, 401k, and taxable. Have 70/30 US/International and tilt a bit more small cap than market weight.

I do have a large-ish multi-tier Emergency fund, with 3 months expenses in money market, 3 months Wellesley, and 6 months in Wellington. They are tax inefficient, but cost basis also goes up substantially, so relatively low taxes if I actually need to sell these.
Thanks for sharing your approach and perspective. I have entertained the thought that if I have a long career I may end up with substantial savings and might feel comfortable with a (nearly) 100% equity portfolio. I have spoken with my spouse and she is temperamentally suited to this approach as well. I think I would only go that route if I ended up with quite a large portfolio relative to my needs, given at that point my portfolio would be mostly for my heirs and less for me.

Going with option 3 (VTWAX) leaves the door open to such an approach, and could still end up being a one-fund portfolio. 8-)
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unclescrooge
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Re: Which ultra-lazy portfolio would you choose?

Post by unclescrooge »

Patzer wrote: Wed Jun 16, 2021 8:51 pm I use a fairly complex portfolio, and like it that way, but I usually tell people who want simplicity to use a target date fund.

I find them too conservative, so I would go for one 10 years after you plan to retire to get more aggressive asset allocations.
I.e. if you want to retire in 2050, put all your money in a 2060 Vanguard Target Date Fund.
I find TRD funds to start of too aggressive and then become to conservative. I actually think the lifestyle funds are a better choice.

But I also have a complex slice and dice portfolio.
nix4me
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Re: Which ultra-lazy portfolio would you choose?

Post by nix4me »

S&P 500 index fund/ETF is all that is needed.
canucksmoney
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Re: Which ultra-lazy portfolio would you choose?

Post by canucksmoney »

OldSport wrote: Thu Jun 17, 2021 7:08 pm
withrye wrote: Thu Jun 17, 2021 6:52 pm
retiredjg wrote: Thu Jun 17, 2021 10:11 am Is there a US:foreign ratio that you feel you could maintain through decades of oscillation? Remember, it is not important to maintain market weight in this area if you are more comfortable with something else. Many people hold 0%, 20%, 30%, and 40% of their stocks in international. Don't let your money make you unhappy by trying to stick with a plan that does not make you happy.
I don't think there is an absolute timeless ratio that I would be comfortable with through decades of oscillation. In retrospect, I would have been comfortable with 50% of both over the past 50 years since the 70s. But that's knowing that market cap of the US has hovered between 40-70% during that time. I don't know what the forward-looking ratio will be, so I'd feel most comfortable maintaining something closer to market cap, whatever that may be. So if the US experiences a large relative decline and ends up at 20% market cap, I wouldn't feel comfortable continuing to hold 50%. This is the allure of VTWAX for me: not only do I get the market cap weight that I want, but I don't have to think and second guess the decision at each turn in the market outlook.
canucksmoney wrote: Thu Jun 17, 2021 10:36 am I am Canadian but we have similar types of accounts. I use the Canadian equivalent of the Lifestrategy funds.

Taxable - 80/20 Lifestrategy
Tax free - 80/20 Lifestrategy
Tax deferred - 100% bonds (@10% of total portfolio)

It is @70/30 AA. It’s good enough.

I do not tax loss harvest. I do not rebalance. It’s very simple.

I could forget about my accounts and it will still be a very reasonable allocation.

I have invested through the dot com and the GFC.

I realized that I simply don’t care enough about the details. But I can hold onto anything reasonable.

I do not need a perfect portfolio just a good enough one. Plus I am incredibly lazy so the less I do, the better.
This is reassuring to hear. In Canada, are stocks preferentially taxed as compared to bond income as they are in the US? I am looking at a likely 0.6% or higher annual cost for my desired LifeStrategy approach as compared to the cheaper options. I'd be ok with that if there weren't a better offer, but in the US (and for now) I get much less tax drag by holding only stocks in my taxable account.
ivgrivchuck wrote: Thu Jun 17, 2021 4:34 pm The challenge is that there doesn't to my knowledge exist a single 100/0 to 60/40 glide path fund.

But you can easily implement your own... For now split everything between VTI/VXUS. 20 years before retirement start putting money into BND, so that the BND allocation increases 2 percentage points per year. Done.

If you want absolute simplicity, choose a retirement target date fund, those typically glide from 94/6 to 35/65. So not exactly what you want, but provides the absolute simplicity...
If I'm willing to pay the ~1% tax drag, I can have my cake and eat it too. I wouldn't hold a single fund through accumulation, but by holding 100% stock in tax-advantaged and then buying increasing amounts of LS-Moderate at 60/40 in taxable, my allocation will naturally drift gradually downward closer to 60/40 over time. Then in retirement everything can be consolidated to LS-Moderate and I'd have a truly simple, truly one-fund portfolio through the rest of retirement.

All of that being said, I think the 1% tax drag is too big a pill to swallow, and I think I'll go with the VTWAX approach. I get some simplicity, some annual tax savings, and most importantly I get to keep an appropriate asset allocation in retirement (the 30/70 allocation of a Target Date Fund is too far away from my target and no desire for simplicity will have me sacrifice on the proper asset allocation for me).
FWIW I'm 100% stock in long term retirement portfolios, including Roth IRA, 401k, and taxable. Have 70/30 US/International and tilt a bit more small cap than market weight.

I do have a large-ish multi-tier Emergency fund, with 3 months expenses in money market, 3 months Wellesley, and 6 months in Wellington. They are tax inefficient, but cost basis also goes up substantially, so relatively low taxes if I actually need to sell these.
Our plan is to have Lifestrategy 80/20 in all the accounts.

Just waiting for some CDs to mature in our tax deferred accounts.

Then we can activate our “just one ETF model”.

My children who are 5-10 years younger than OP. They own the same 100% equity world index ETF in all their accounts.

I am surprised they chose to keep it simple from the start.
longinvest
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Re: Which ultra-lazy portfolio would you choose?

Post by longinvest »

Withrye, it's easy to look at one tree and lose sight of the forest. There are many unknowns about future investing results and taxes.

See some comments below.
withrye wrote: Wed Jun 16, 2021 8:45 pm I have been nibbling at the edges of this question for a while, determining what the tax cost for VSMGX would be for me (~1% per year), and trying to figure out whether I could live with a combination of Vanguard Tax-Managed Balanced (VTMFX) mixed with Vanguard Total International (VTIAX) (see here). I figured now was the time to ask the broader question about what approach might be best for me.
withrye wrote: Thu Jun 17, 2021 6:52 pm I am looking at a likely 0.6% or higher annual cost for my desired LifeStrategy approach as compared to the cheaper options. I'd be ok with that if there weren't a better offer, but in the US (and for now) I get much less tax drag by holding only stocks in my taxable account.
withrye wrote: Wed Jun 16, 2021 8:45 pm Portfolio size: Mid-six figures, all in a combination of traditional and Roth accounts
...
Contributions

New annual Contributions
$19500 his 401k 2% match
$19500 her 403b 2% match
$6000 his backdoor Roth IRA
$6000 her backdoor Roth IRA
$30000 taxable (for retirement, not short term goals)
Currently 100% of the portfolio (mid six figures) is in tax-sheltered accounts. New contributions will be approximately 63% tax-sheltered and 37% taxable.

If all accounts were to grow at an identical speed, we can anticipate the taxable account to represent approximately 23% of the portfolio in 10 years, using a very approximate calculation: ($30,000 X 10) / ($500,000 + $81,000 X 10) = 23%. In 30 years, a similar calculation tells us that the taxable account would represent approximately 30% of the portfolio.

So, the average taxable account size, for the next 10 years, would approximately be (23% / 2) = 12% of the portfolio. In other words, the additional cost of VSMGX would represent (0.60% X 12%) = 0.07% of the portfolio per year on average (from 0% in the first year to 0.14% in the 10th year). Over the next 30 years, the additional cost would represent approximately 0.09% of the portfolio per year on average (from 0% in the first year to 0.18% in the 30th year). This puts some perspective on the claimed additional cost of VSMGX.

For many people, this additional cost doesn't affect portfolio growth. Let me explain. I do hold a single identical all-in-one global balanced index ETF in all my investment accounts, including my taxable account. When I file my annual tax return, if I owe the government some money, I just take it off my spending budget. I don't calculate the portion of taxes attributable to my taxable investments and I don't withdraw the money from my taxable investment account to pay it. The tax cost of my taxable account doesn't affect the growth of my taxable account; it only affects my spending. But, I don't really feel this cost as, even if I calculated it, it would be small enough relative to my overall spending budget not to make a significant difference.

I could continue by considering the impact of only holding stocks in the taxable account through time (as the taxable account grows faster, taxes on dividends grow faster and unrealized capital gains grow faster, too), but the more I add considerations, the more assumptions have to be made and, as a result, the bigger the error range grows. Some people claim that holding VSMGX could lead to a high capital-gains tax cost in the far future to switch out of it. Yet, the capital-gains tax cost of switching out of a stock-only fund is likely to be bigger if, for example, one wanted to switch to a One-Fund Portfolio during retirement. Switching funds, after years of growth in a taxable account, is usually costly.

Bonds frighten many investors; just look at the number of threads (and posts) by forum members fearing bonds and the number of financial articles about how bonds are wealth destroyers on the brink of a Bondaggedon. This isn't anything new. I've joined this forum in 2012 and it was already the case. But, when I think about it rationally, I discover that bonds are marketable securities; their price is set by buyers and sellers agreeing on a price or, if you prefer, by the Law of supply and demand.

Glide paths rely on many assumptions, like that a stocks-only portfolio will beat the (balanced) market portfolio, that the investor will not need (part of) the money before the target date, etc. Let me suggest an alternative: holding a balanced portfolio all lifelong, even during accumulation. It might not be as expensive as one might think. I suggest to read about the surprising mathematics of retirement investing.

We don't even know if an all-stocks portfolio will beat the market portfolio (which currently holds approximately 40% in bonds) over the next 30 years. At the end of the day, the market is the market. It doesn't care if we're accumulating or decumulating, it will return whatever it wants. I think that Vanguard's LifeStrategy Moderate Growth Fund is close enough to the global stock-and-bond market portfolio; it has a constant 60/40 stocks/bonds target and a moderate U.S. home bias justified by the additional (political, etc.) risks of investing into foreign assets.

Holding a balanced portfolio for life can require a mind shift. There will always be better portfolios that outperform it every single year, but the better portfolios might differ from year to year. Balanced portfolio returns will always seem boring with no chance ever of a speculative big win. I'm fine with that because I'm just aiming to retire with dignity; I don't care about outperforming others, but I'd be quite unhappy to get lower-than-average returns.

My wife and I have all of our portfolio invested into a single identical all-in-one ETF similar to VSMGX (but with a different home bias) in all accounts, including taxable accounts. This has significantly simplified investing for my wife. It has also succeeded at stopping me from tinkering with our portfolio.
Variable Percentage Withdrawal (bogleheads.org/wiki/VPW) | One-Fund Portfolio (bogleheads.org/forum/viewtopic.php?t=287967)
Topic Author
withrye
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Re: Which ultra-lazy portfolio would you choose?

Post by withrye »

Longinvest,

First, thank you as always for being willing to spend so much of your time on these topics. I greatly appreciate the time and effort.
longinvest wrote: Fri Jun 18, 2021 6:02 pm Withrye, it's easy to look at one tree and lose sight of the forest. There are many unknowns about future investing results and taxes.

See some comments below.

Currently 100% of the portfolio (mid six figures) is in tax-sheltered accounts. New contributions will be approximately 63% tax-sheltered and 37% taxable.

If all accounts were to grow at an identical speed, we can anticipate the taxable account to represent approximately 23% of the portfolio in 10 years, using a very approximate calculation: ($30,000 X 10) / ($500,000 + $81,000 X 10) = 23%. In 30 years, a similar calculation tells us that the taxable account would represent approximately 30% of the portfolio.

So, the average taxable account size, for the next 10 years, would approximately be (23% / 2) = 12% of the portfolio. In other words, the additional cost of VSMGX would represent (0.60% X 12%) = 0.07% of the portfolio per year on average (from 0% in the first year to 0.14% in the 10th year). Over the next 30 years, the additional cost would represent approximately 0.09% of the portfolio per year on average (from 0% in the first year to 0.18% in the 30th year). This puts some perspective on the claimed additional cost of VSMGX.
I must admit I did not believe this result at first. The idea of paying 1% per year on a holding was so outrageous at face value that I did not follow through on my statement above to determine the actual dollar impact for various scenarios.

I started by looking at 5% growth of a $500,000 starting investment with $51,000 in periodic contributions and 4.6% growth of a $0 starting investment with $30,000 in periodic contributions for 30 years:

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FV(5%, 30, -51000, -500000, 1) = $5,718,771
FV(4.6%, 30, -30000, 0, 1) = $1,947,159
This represents the difference in size between the accounts, with no tax drag in the tax-advantaged accounts and 0.4% tax drag in an account holding "tax-efficient" assets.

I then compared this with an account with 1% tax drag, representative of VSMGX for my tax brackets:

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FV(4%, 30, -30000, 0, 1) = $1,749,850
This represents a difference of $197,309 over 30 years on a hypothetical maximum $7,665,930 account, or 2.57% of the account (an average of 0.09% per year, as you calculated).

This represent the best case scenario, though, in which we are able to maintain a roughly 2:1 ratio of contributions between tax-advantaged and taxable contributions. What if my spouse decides to stop working, and we have access only to my 401k and the backdoor Roth IRA for both of us?

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FV(5%, 30, -31500, -500000, 1) = $4,358,436
FV(4.6%, 30, -49500, 0, 1) = $3,212,813
FV(4.6%, 30, -49500, 0, 1) = $2,887,253
This represents a difference of $325,560 over 30 years on a hypothetical maximum $7,571,249 account, or 4.3% of the account (an average of 0.22% per year).

I think I could live with a ~5% difference in theoretical end-portfolio value if it meant a radically simpler portfolio. I will discuss with my wife.
For many people, this additional cost doesn't affect portfolio growth. Let me explain. I do hold a single identical all-in-one global balanced index ETF in all my investment accounts, including my taxable account. When I file my annual tax return, if I owe the government some money, I just take it off my spending budget. I don't calculate the portion of taxes attributable to my taxable investments and I don't withdraw the money from my taxable investment account to pay it. The tax cost of my taxable account doesn't affect the growth of my taxable account; it only affects my spending. But, I don't really feel this cost as, even if I calculated it, it would be small enough relative to my overall spending budget not to make a significant difference.

I could continue by considering the impact of only holding stocks in the taxable account through time (as the taxable account grows faster, taxes on dividends grow faster and unrealized capital gains grow faster, too), but the more I add considerations, the more assumptions have to be made and, as a result, the bigger the error range grows. Some people claim that holding VSMGX could lead to a high capital-gains tax cost in the far future to switch out of it. Yet, the capital-gains tax cost of switching out of a stock-only fund is likely to be bigger if, for example, one wanted to switch to a One-Fund Portfolio during retirement. Switching funds, after years of growth in a taxable account, is usually costly.

Bonds frighten many investors; just look at the number of threads (and posts) by forum members fearing bonds and the number of financial articles about how bonds are wealth destroyers on the brink of a Bondaggedon. This isn't anything new. I've joined this forum in 2012 and it was already the case. But, when I think about it rationally, I discover that bonds are marketable securities; their price is set by buyers and sellers agreeing on a price or, if you prefer, by the Law of supply and demand.

Glide paths rely on many assumptions, like that a stocks-only portfolio will beat the (balanced) market portfolio, that the investor will not need (part of) the money before the target date, etc. Let me suggest an alternative: holding a balanced portfolio all lifelong, even during accumulation. It might not be as expensive as one might think. I suggest to read about the surprising mathematics of retirement investing.

We don't even know if an all-stocks portfolio will beat the market portfolio (which currently holds approximately 40% in bonds) over the next 30 years. At the end of the day, the market is the market. It doesn't care if we're accumulating or decumulating, it will return whatever it wants. I think that Vanguard's LifeStrategy Moderate Growth Fund is close enough to the global stock-and-bond market portfolio; it has a constant 60/40 stocks/bonds target and a moderate U.S. home bias justified by the additional (political, etc.) risks of investing into foreign assets.

Holding a balanced portfolio for life can require a mind shift. There will always be better portfolios that outperform it every single year, but the better portfolios might differ from year to year. Balanced portfolio returns will always seem boring with no chance ever of a speculative big win. I'm fine with that because I'm just aiming to retire with dignity; I don't care about outperforming others, but I'd be quite unhappy to get lower-than-average returns.

My wife and I have all of our portfolio invested into a single identical all-in-one ETF similar to VSMGX (but with a different home bias) in all accounts, including taxable accounts. This has significantly simplified investing for my wife. It has also succeeded at stopping me from tinkering with our portfolio.
While I accept the logic of it not affecting portfolio growth, the costs spent out of cash flow to pay the extra taxes does mean less consumption now in favor of preserving portfolio growth for consumption later. Or put another way, if I did not have to pay those extra taxes I could put even more into the portfolio, resulting in a higher end-portfolio value.

I am not frightened by bonds, and I do not worry that they have no ultimate place in my portfolio. However, I do feel it is rational to assume that in the long run stocks will outperform bonds. Not because of history, but because of how they are financially and legally structured. I have read your nice post about the mathematics of retirement investing. I am not concerned about extra time needed to save, but there is little cost to pursuing a higher stock allocation in accumulation by holding 100% equity in tax-advantaged while starting the taxable account with VSMGX. Since there is no cost, little mental overhead, and I can accept the higher risk/return, why not make my own glide path?

Again, thank you for a very informative post. I had previously come to the conclusion that the 100% VTWAX approach was the right one for me. I hate changing my mind, but I hate being wrong even more so I'm happy to change my mind if circumstances require it. I will consider the numbers above (~5% variation in end-portfolio value) and discuss with my wife.
wetgear
Posts: 859
Joined: Thu Apr 06, 2017 10:14 am

Re: Which ultra-lazy portfolio would you choose?

Post by wetgear »

Triple digit golfer wrote: Wed Jun 16, 2021 9:43 pm A more tax efficient route is using VTSAX/VTIAX in taxable instead of VTWAX, allowing you to claim the foreign tax credit.
+1 Also you can use contributions to these 2 funds to adjust your % international back to where you want it.

When you want bonds they should go in your pretax accounts and you can sell stocks there to purchase them.
Topic Author
withrye
Posts: 169
Joined: Mon Feb 29, 2016 12:48 pm

Re: Which ultra-lazy portfolio would you choose?

Post by withrye »

longinvest wrote: Fri Jun 18, 2021 6:02 pm Withrye, it's easy to look at one tree and lose sight of the forest. There are many unknowns about future investing results and taxes.

See some comments below.

...
withrye wrote: Wed Jun 23, 2021 5:46 pm Again, thank you for a very informative post. I had previously come to the conclusion that the 100% VTWAX approach was the right one for me. I hate changing my mind, but I hate being wrong even more so I'm happy to change my mind if circumstances require it. I will consider the numbers above (~5% variation in end-portfolio value) and discuss with my wife.
Longinvest,

I wanted to update you that my wife and I had a long conversation yesterday about our long term investing goals, approach to financial arrangements, sentiments about tax costs, and of course the topic at hand regarding holding VSMGX in the taxable brokerage account that we are about to open. She read the entirety of this thread and we walked through several hypothetical scenarios.

We've come to the conclusion that the additional cost of holding VSMGX represents an acceptable trade off for the radical simplicity and protection from behavioral risk. Thank you again for your time (here and elsewhere across the forum) and for the clear examples that helped put the cost into perspective.
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